Learn about the most popular types of personal loans. These are the top 10 loan options to consider when you're searching for a personal loan.
So you need some cash. We've all been there.
But between your checking accounts, savings funds, and the cash under your mattress, you just don't have enough.
Everyone's situation is unique.
You might even have the funds in your savings account, but you just don't want to use that money for this instance—and that's OK.
Maybe you need money for your home, car, or business, or maybe you're trying to consolidate your debt.
Regardless of your reason for needing money, applying for a personal loan may be your best solution.
But note that there is no one-size-fits-all loan option for everyone, so before you walk into your local bank and tell them that you need a loan, it's important for you to educate yourself first.
By understanding the differences between these options, you'll be in a position to get the loan that's best for you, even borrowing the highest possible amount at the lowest possible interest rate—if you pick the right loan!
It doesn't matter if you have bad credit, excellent credit, or fall somewhere in the middle, because in this guide, there's a loan option for almost everyone.
I've narrowed down the top 10 types of personal loans for you to consider.
1. Secured Personal Loans
The concept behind a secured personal loan is simple: You borrow money against your assets.
These assets are used as collateral in the event that you miss payments or default on the loan.
Houses, cars, and boats are all examples of common types of collateral used for secured loans, but you can also use your savings accounts or stocks.
There are a few different scenarios why getting a secured personal loan would be your best option. These are the top reasons that people took out personal loans last year.
For starters, it's much easier to qualify for a secured loan than an unsecured loan.
If you have poor credit, it may be difficult for you to find a bad credit loan, but lenders are more likely to offer you money if you can put up collateral.
Still, even if you have good credit, putting up collateral for a secured loan might be a great option for you as well.
That's because secured loans typically offer more favorable interest rates.
Again, this relates back to the idea of putting your assets on the line.
In doing so, the lender perceives you as less of a risk, which translates to lower interest rates.
Secured personal loans allow you to borrow more money, depending on how much your assets are worth and your equity percentage in those assets.
When it comes to getting a loan, most lenders would want to see proof of a steady income, but if you own property, you may be able to get a secured personal loan even without having a job.
With all of this in mind, there are still drawbacks to secured loans.
If you can't pay back your debts, then you'll likely have to say goodbye to the property you put up as collateral, which could have a huge impact on your life if you put up something like your home.
So just don't put yourself in a position where you agree to terms that you are unable to pay.
2. Unsecured Personal Loans
Unsecured loans are extremely popular so it's important to understand just how they work.
Borrowers get loaned money without having to put up any type of collateral and these loans can be used for just about anything.
The terms of your unsecured loan will largely depend on your credit score, which is why it's so important for you to understand how credit scores work.
By the way, in case you want to improve that credit score of yours, did you know that taking out a small personal loan just might help?
Now take a look at how the interest rates can fluctuate based on different credit scores.
Because it's a different type of loan, having it included in your credit report can add a boost to your score.
For those of you with excellent credit, an unsecured loan is probably your best option.
Even if you have a credit score that falls in the good or average range, financial institutions will still be willing to give you a personal loan, just at a higher rate.
People with poor credit scores should consider alternative options, such as a secured personal loan, to avoid paying outrageously high-interest rates.
You should always shop around for different loan terms, and see which lender will give you the most money at the lowest interest rate.
Don't agree to terms that you're uncomfortable with!
The most logical place to start your search for an unsecured personal loan is at your local bank but don't commit without visiting other banks.
You may even consider setting up a meeting at a credit union as well.
Since credit unions are owned by their members and operate as nonprofits, they are more willing and able to give borrowers favorable interest rates for unsecured loans.
3. Co-signer Loans
Co-signed loans are common for people with little to no credit history.
For example, a young adult may get a parent to cosign a loan for them, and the lender will use the credit score of the cosigner to determine the interest rate and loan terms.
This is great news for you if you know someone with excellent credit who is willing to help you out.
Another benefit of a co-signed loan is that it will help you improve your own credit score if you can make payments on time—a great way to build your credit score from scratch!
Co-signer loans are also an option for people with bad credit.
The major drawback of a co-signed loan is for the co-signer, which is because they are taking on equal responsibility for the loan's repayment.
With that in mind, should come as no surprise that the majority of co-signed loans are between family members.
If you can't make your payments, then the co-signer will have to do so.
Otherwise, it will also adversely affect their credit score aside from yours.
So before you ask someone to co-sign your loan, make sure that they understand these terms and conditions.
4. Personal Line of Credit
Lines of credit function in a way that's very similar to credit cards.
Instead of the bank giving you a lump sum of cash, you'll get a credit line instead, and then you can borrow the money whenever you need it.
One of the best parts about a personal line of credit is that you only need to pay interest on the amount that you borrow, as opposed to the full amount of the credit line.
I recommend personal lines of credit for those of you who will need to borrow money for expenses that are ongoing or recurring—or even for emergency situations.
While you may not need money right now, there could be a situation in the future when you will.
Rather than go through the loan process at that time, it's much easier to just dip into your personal line of credit, but if you're seeking cash for just a one-time expense, you should probably seek an alternative to a new credit line.
5. Debt Consolidation Loans
If you've got lots of high-interest debts to keep track of, this type of loan may be your best option.
I'll give you a simple scenario to explain how it works:
Let's say that you have three credit cards, all with outstanding balances.
Rather than making three separate payments each month, you can take out a personal loan to pay off all that debt.
Here's a look at the average credit card debt in American households:
As you can see, 2017 was the lowest that it's been in years, but with that said, it's still in the ballpark of $15,000, which is still high.
Once you consolidate your debt with a personal loan, you'll just have to make one fixed monthly payment to pay back this new singular loan.
In most instances, this type of loan will offer you lower interest rates than what you're currently paying, so it helps save you money on interest and simplifies your payment plan.
6. Fixed-rate Loans
Fixed-rate loans behave just as the name implies.
Your interest rates and monthly payments remain the same for the duration of your loan.
This is the best option for those of you who want to make regular payments each month.
They also save you from the potential of rising interest rates on longer loans.
Fixed-rate loans are also easier to budget, since you'll know exactly what needs to be paid each month.
7. Variable-rate Loans
Variable-rate loans are a bit more complex.
As you can tell by the name, the interest rate applied to the amount you borrow can change, but how does that work?
In simple terms, here's how that works: Banks will set a benchmark rate, which gets tied to your loan, and when the rate fluctuates, so will your loan rate, along with your monthly payments and interest rates as well.
There are pros and cons to this scenario.
On the one hand, you could benefit from lower interest rates and lower monthly payments, but obviously, the risk is that these rates and payments could rise.
You may be able to set up your variable-rate loan with a cap limit for how much it can change over a set period, as well as for the duration of the loan.
But regardless, variable-rate loans are best for the short-term because it's less likely that there will be a drastic change in a short period of time.
8. Wedding Loans
Wedding loans are used to pay for, yes, you guessed it: a wedding.
The average cost of a wedding is more than $35,000, so with these rising costs, a new couple may need some help to pay for these expenses.
You can use a wedding loan to help pay for costs associated with your engagement, wedding, and even your honeymoon.
It can cover expenses like hotel bookings, catering, jewelry, decorations … basically, any cost that's related to the event.
When it comes to wedding loans, you can expect these interest rates to be higher during prime wedding seasons.
9. Home Improvement and Renovation Loans
This loan is another example of funds that need to be used for a specific purpose—a great option for homeowners who need to fix up their property.
There are a few different ways that you could set this up, depending on what you're looking for.
In some instances, these loans are designed specifically for new homeowners, allowing them to make changes to the structure of the home as well as cosmetic improvements.
There are other loan options for people who want to make home renovations without changing the structure of their home, but just because your reason is on this list, it doesn't automatically qualify you for every home renovation loan.
Here is a look at the top reasons people start a home improvement project:
For example, the size and value of your home will be a factor.
Certain high-priced homes won't qualify unless an appraiser can say that the improvements will add value to the home.
There are even specific loans for rural development improvements.
These funds can be used to repair things like roofing, electric work, plumbing, siding, the foundation, and anything else that would need an upgrade due to safety concerns.
You can consider a home renovation loan if the interest rates are less than other types of loans that you've researched.
Otherwise, you may be able to get these funds from an alternative method, such as a standard unsecured loan, secured loan, or line of credit.
10. Pawn Shop Loans
A pawn shop loan is similar to a secured loan, which we talked about earlier.
However, you'll be using collateral of lesser value.
Instead of putting up your car or your home, like you would with a bank, you could bring something like a wristwatch or television to a pawn shop.
Obviously, you'll get less money for this type of collateral, but that may be all that you need for your current situation.
The downside of a pawn shop loan is the high-interest rates, although they will still probably be less than a payday loan.
If you don't pay back what you owe, the pawn shop can sell your collateral.
But the benefit of a pawn shop loan is that it won't hurt your credit score, so it may be a reasonable option for those who have smaller cash needs and are concerned about their credit scores.
Choosing the Right Personal Loan
The main benefit of a personal loan is the fact that you can use your cash for just about any purpose.
You can use a personal loan to start a family, buy a car, or renovate your home.
Other kinds of loans may restrict what the borrowed funds may be used for, but in general, personal loans remain a flexible option for people in most situations.
Now that you've had a chance to review this list, it's time to decide which loan is best for you.
There are many more types of personal loans out there, but I simply wanted to offer you a wide range of options based on different scenarios.
Don't be intimidated by this list.
Right away you can eliminate certain options that don't fit your needs.
Do not apply the for first loan that you come across but rather, make sure you weigh your options.
When it comes to selecting the right personal loan, there are factors that you should take into consideration—things like your credit score, the amount of money you need, and how long you want to pay it back for.
Keeping these things in mind will help you narrow your search.
Are you looking to apply for a personal loan yourself?
What would you use the funds for, in case you get it?
Feel free to share your thoughts in the comments below.